Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

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Wednesday, January 5, 2011

Vertical Integration and Efficiency: an application to the Italian Machine Tool Industry

Posted by D. Daniel Sokol

Fabio Pieri and Enrico Zaninotto (DISA, Faculty of Economics, Trento University) analyze Vertical Integration and Efficiency: an application to the Italian Machine Tool Industry.

ABSTRACT: This paper analyzes the relationship between firm efficiency and vertical integration in the Italian machine tool (MT) industry. A theoretical model of entry and competition within an industry has been set up. In this model firms can choose either to be vertically integrated or not: the most efficientfirms self-select in being vertically integrated, while less efficientfirms prefer a disintegrated structure and they both coexist in equilibrium. In the second part of the paper the relationship between efficiency and vertical integration has been tested using a stochastic frontier framework in an novel panel dataset including around 500 MT builders. The theoretical prediction is confirmed: outsourcing seems a rational choice for less efficient firms to make positive operating profits and stay in the market; on the other hand, more efficient firms exploit their efficiency advantage to control a greater part of the production chain, possibly benefiting from greater coordination among different phases and tailored intermediate inputs.

http://lawprofessors.typepad.com/antitrustprof_blog/2011/01/vertical-integration-and-efficiency-an-application-to-the-italian-machine-tool-industry.html

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